Europe, China to Strengthen Relations as US Poised to End Climate Deal -- 2nd Update

European Union and Chinese leaders gathered in the EU capital Thursday to strengthen ties amid increasingly tense relations with the U.S., but a brewing fight over investments bedevils their efforts to tighten economic links.

The EU and China are set to claim a quick diplomatic win on climate change -- doubling down on the Paris agreement following President Donald Trump's decision to nix the deal. They are also expected to address foreign policy issues, such as tensions over North Korea's push to acquire nuclear arms.

But ahead of the summit, EU officials warned that progress will likely prove elusive on improving European access to the Chinese market -- almost four years after Brussels and Beijing started negotiating an investment agreement.

Beijing's t rade restrictions have crippled European investments in China during that period, while Chinese companies invested a record $48 billion in EU companies last year. That is fueling protectionist backlash from EU governments and lawmakers, who are calling on the European Commission, the bloc's executive, to establish a review mechanism to scrutinize foreign investments in Europe.

"Trade with China has to be based on reciprocity," European Trade Commissioner Cecilia Malmstrom said this week at the European Parliament, where lawmakers raised concerns about the uneven playing field. "We hope to make progress."

Calls have been gaining momentum this year to create a European version of the Committee on Foreign Investment in the U.S., or CFIUS, which reviews, investigates and controls sensitive foreign investments.

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Germany, France and Italy asked Ms. Malmstrom in February to consider a bloc-wide response to non-EU investors acquiring European companies with breakthrough technologies.

"We are worried about the lack of reciprocity and about a possible sellout of European expertise," Berlin, Paris and Rome said in a joint letter to the EU's trade chief. "What is needed is a European solution...an additional protection."

In March, EU lawmakers followed with a request for a commission proposal on the matter.

The European push to protect strategically important industries or sectors central to national security interests comes on the heels of a shopping spree by foreign investors, particularly Chinese companies. That trend is particularly acute in Germany, where Chinese takeovers of local firms hit an annual record last year.

"China has been very much voicing its support for free trade and globalization, especially now that the U.S. is less engaged," said Luisa Santos, international relations director at BusinessEurope. "But what we want to see is that the words are matched with action." The advocacy group, which represents national business federations from 34 European countries, doesn't yet have a position on the calls for the bloc to review foreign investments, she said, adding that businesses strive for open markets on both sides.

The debate to screen foreign investments at the EU level follows a similar discussion in 2011, which fizzled out as the bloc clung to every dollar it could attract to fight off the aftershocks of the global financial crisis.

It is unclear whether the renewed push will garner enough support from the bloc's 28 members. Some crisis-hit EU countries, like Spain and Portugal, could potentially lose vital investments should an EU committee deter acquisitions.

National regulators can already block foreign takeovers on issues likes national security. Instead of transferring more authority to Brussels, a short-term fix could be to harmonize EU members' responses to threats from foreign investments, an EU official said.

Meanwhile, Brussels is focused on pushing China, and other trade partners, to reciprocate the EU's commitment to open markets.

"There are certainly problems that come up now and again," Mr. Li said Thursday during a visit to Berlin.

At their joint press briefing, German Chancellor Angela Merkel pressed the Chinese premier on equal treatment of European companies and clinching an investment agreement with the EU.

"We are both in favor of fostering free trade and the simplification of investment," Mr. Li said, before flying to Brussels.

Despite public avowals, however, Beijing has repeatedly refused to start discussions on market access, the EU official said, adding, "It's high time we saw some commitments to their willingness to open up."

As investment talks dragged on, Chinese investors late last year got a taste of the restrictions that may be looming.

The White House in December followed CFIUS advice and blocked a Chinese buyer from purchasing German chip-equipment supplier Aixtron SE, citing U.S. security concerns. Aixtron has sufficient U.S. operations for Washington to scuttle the deal.

As European officials weigh the benefits of creating an EU version of CFIUS, Chinese companies are already concerned about intense scrutiny of their deals by the bloc's competition authorities, according to Claudia Vernotti, director at ChinaEU, a business-led association in Brussels.